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An Imaginary Tax Californians May Be Forced to Pay

If Timothy Alan Simon has his way, California consumers will soon get nicked for a nonexistent tax, paying millions of dollars each year for a tax that will go not to finance government, but to enrich a monopoly.

Simon is a securities lawyer whom Gov. Arnold Schwarzenegger (R) appointed to the California Public Utilities Commission (PUC). Simon wants to treat partnerships, which are exempt from corporate income taxes, as if they paid those taxes. The result would be to force customers of every rate-regulated monopoly that organizes itself as a partnership to shell out money to cover a corporate income tax that simply is not applicable.

There is a term to describe this: corporate socialism.

Even if the ultimate cost works out to only a quarter per Californian per year, it would mean an extra $11.1 million in profit to the Santa Fe Pacific Pipeline (SFPP). If the costs are higher, the extra profits would scale up accordingly.

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Simon has filed an alternative decision and, barring loud protests from the public, it will probably be adopted by the full commission and become the rule.

Historically, regulated utilities included in the rates they charge only the corporate income tax the utility owed. That worked fine when each utility was a locally owned corporation in the business of making, transmitting, and distributing electricity, natural gas, or water.

When the parent holding company form became common, the utility industry managed to hang onto the corporate income tax being built into rates customers must pay. The industry persuaded regulators that including the corporate income tax in setting rates was fair because there was an actual corporate income tax on the holding company, regardless of whether its losses in other unrelated businesses might be offsets that resulted in no taxes going to the government.

Simon's alternative decision acknowledges a previous commission decision that "an allowance for tax expense is only a just and reasonable charge when there is likely to be an actual tax expense by the utility."

But Simon wants to go much further. He wants to impose on consumers the corporate income tax even when the utility is organized as a partnership, which by law is exempt from the corporate income tax.

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Now Simon, who worked at firms with utility and energy trading interests, wants to do his part to force higher costs on consumers and inflate profits for a monopoly in this case and, given the way his proposed decision is worded, for all regulated utilities in California.

View TaxAnalysts' David Cay Johnston's opinion in its entirety on TAX.com.